The Canada-Korea Trade Deal

By | March 5, 2014

Here is a piece I wrote as an op-ed in the Financial Post on 25 February 2014.

Lawrence L. Herman: Big Three stall Canada-Korea trade deal

  | February 25, 2014
Since the U.S. signed a free-trade deal with South Korea, U.S. exports to that market have grown.

The tug-of-war in Canada’s long-delayed trade agreement with South Korea, reported regularly in this newspaper, continues. It’s not a happy story.

Pulling in one direction are the Canadian branches of the Detroit Three, led by Ford Canada, joined by the Canadian auto-workers represented by Unifor.

Pulling in the opposite direction are a wide array of manufacturing industries, the aerospace and agrifood business and the financial community.

Canada’s Detroit Three have been lobbying against the Korean trade deal for years – a deal that Canada was on the verge of signing in 2008.

In the meantime, in 2011, the U.S. went ahead and signed its own free trade agreement with Korea, stealing a march while Canada dithered. Ironically, the U.S. deal was fully supported by the Detroit Three.

Since then, U.S. exports to the Korean market have grown, while Canadian exports have plummeted. As Michael McCain of Maple Leaf Foods has lamented recently, Canada’s agriculture and food exports to Korea alone have dropped from more than $1-billion to just over $300-million, a loss of more than 70% over the past two years.

Economic studies have shown that the Korean agreement would have resulted in $1.6-billion annually in trade gains for Canada, with benefits spread fairly evenly east and west.

Recognizing the economic and strategic importance of getting the deal done, the Harper government negotiated further adjustments to meet the auto industry’s concerns and now wants to finally sign the trade pact.

Yet it appears that the Canadian Detroit Three, Ford Canada particularly, continue to oppose the agreement. The president of Ford Canada recently described the U.S.-Korea agreement as a “disaster” for American auto makers, urging the Conservative government not to make the same mistake as the United States.

This is pretty odd, given the support of the Detroit Three for the U.S.-Korea deal. In December 2010, Ford’s president & CEO said that Ford “applauds” the agreement. He congratulated the Obama administration for its “tireless efforts” in getting the deal done.


Then on January 25, 2011, in testimony before the U.S. House Ways and Means Committee, Ford’sVice President of International Governmental Affairs said his company “strongly encouraged” the Congress to approve the agreement.

It’s true that the Korean agreement hasn’t led to a flood of U.S. cars going to that country. But the U.S.-Korea deal only entered into force in 2012 and it’s impossible to judge the long-term economic benefits after only one year of operation, let alone to describe it as a disaster.

Even if we take its first 12 months, U.S. exports to South Korea of such items—including aircraft, autos, wines, soybeans and orange juice—rose 4.1%. American-made auto exports to Korea went from $340-million in 2011 to over $800-million in 2013.

Now let’s look at some Canadian numbers.

Canada produces over 2.6 million vehicles each year, 85% of which are exported. Independent studies done both for Canada’s trade department and for Industry Canada have shown that removing the 6.1% duty on Korean vehicles will have almost no impact on Canadian production.

While, yes, the deal will modestly increase the number of Korean vehicles we import – by a mere 1.6% of total Canadian sales – these studies also show that a trade deal would leave annual Canadian production basically untouched, reducing the number of Canadian-made vehicles by an imperceptible .04%.

There are other aspects of the story that are lost in the rhetoric. For one thing, of the 124,000 vehicles Korean manufacturers shipped to Canada (2010 data), close to a third entered duty-free from the U.S. anyway, where they’re now being made.

In any case, this is not just about cars and trucks.

Canada is a country with long-term economic and trade interests in the Asia-Pacific region. Quite apart from the direct trade benefits, cementing this agreement with South Korea will have political significance and reinforce Canada’s engagement in that part of the world.

It will also provide an established framework for the conduct of our commercial relations and a dispute resolution process to resolve differences, something we don’t have now.

In 2013, the U.S. Congressional Research Service did an in-depth study of the impact of the U.S.-Korean agreement and signalled that its rejection or indefinite delay would have called into question the viability of trade agreements as a serious U.S. tool to strengthen economic ties with its major trading partners.

That point applies with equal force to Canada.

Lawrence L. Herman, Herman & Associates, is a Senior Fellow at the C.D. Howe Institute, Toronto.